Energy

Post Budget, All Signs Point to an Impending Strategic Sale in National Petroleum Companies

Instead of taking concrete measures on energy, the government is dangling some tantalising proposals.

A technician works inside the Oil and Natural Gas Corp (ONGC) group gathering station on the outskirts of Ahmedabad March 2, 2012. Credit: Reuters/Amit Dave/Files

A technician works inside the Oil and Natural Gas Corp (ONGC) group gathering station on the outskirts of Ahmedabad March 2, 2012. Credit: Reuters/Amit Dave/Files

If last year’s Budget was low on energy, this year’s is even lower. Instead of concrete measures, the government is dangling some tantalising proposals. This year’s Budget proposes the creation of an integrated public sector oil major through the merger and consolidation of existing national oil companies (NOC). While the finance minister did not elaborate on the rationale for such a proposal, it makes eminent good sense to create big companies that can take on their powerful counterparts elsewhere in the world. In fact, India should have done this years ago.

The last few decades have witnessed consolidation in the oil and gas industries. The original seven sisters merged to form three giant global corporations – BP, Chevron-Texaco and ExxonMobil. China had realised nearly a quarter of a century ago that taking on multinational oil corporations in the global marketplace would require muscle and money power. It went on to create three major NOCs – CNPC (Petrochina), Sinopec and CNOOC – and listed them on international stock exchanges. Petrochina and Sinopec are vertically integrated corporations with competence in the entire value chain from exploration to refining and marketing as well as global acquisitions. Their CEOs come armed with English education and world-class training in the oil business, capable of holding their own against competition from anywhere. Petrochina’s market cap last year was a beefy $203 billion, just behind global giant ExxonMobil with a market cap of $347 billion. Last year, CNPC ranked third in the Fortune Global 500 index.

If India manages the travails of this transition – it could be an HR nightmare – the merger should firmly place the Indian company on the global oil map. Indian Oil Corporation and ONGC would probably be merged to form the giant. Whatever beast is created by this merger, it has to have a clear vision and the autonomy to pursue that vision. Of course, the government should ensure that the vision is aligned with our national interest. Such a merger would also bring a lot of transparency in the functioning of the company since it will have to be listed on global stock exchanges to improve its credit-rating and leverage the benefits of the merger.

The smaller NOCs, such as BPCL and HPCL or both, may be on the block for strategic disinvestment. After all, the Narendra Modi government has quietly gone and repealed the nationalisation Acts of foreign oil companies paving the way for strategic sale of NOCs. In 2003, the Supreme Court had ruled against strategic disinvestment citing the need to repeal the nationalisation laws. In recent months, the government has also cleaned up the balance sheets of oil companies by promptly paying the subsidies. All these point to an impending sale.

The second significant announcement in the Budget is the cut in the basic customs duty on LNG imports from 10% to 5%. This again, is a welcome measure since the much acclaimed domestic gas discoveries in the KG Basin have turned out to be a mirage, stranding a whole lot of investments that came on the promise of domestic gas glut. The few gas-fuelled industries that continue to operate have had to use imported LNG. These last two years have seen inexpensive spot cargoes bailing them out, but as gas prices begin to harden, the duty cut will give them some relief.

Finance minister Arun Jaitley also announced the setting up of two more strategic petroleum reserves (SPRs) – he mentioned caverns – in Orissa and Rajasthan. He stated that the total capacity of crude that could be stored in these SPRs would be 15.33 million metric tonnes. However, in the absence of a mechanism to fund filling up the storage, creating additional idle capacity is a questionable proposition, at least for now. We have managed to fill up thimblefuls into our existing SPRs, but to ensure a modicum of energy security in the event of a supply disruption, we need to have at least 45 days supply in storage. Currently what we store in SPRs is minuscule. We should have filled up our storage when crude prices were low. Instead we are setting up more SPRs.

The Budget has not cared to reduce the exorbitant taxes on petroleum products – after all, the sector is a milch cow for any government, never mind if taxing petroleum products is regressive since the burden is universally shared by all. All the major petroleum products that comprise 70% of the industry’s turnover are outside the ambit of GST. The budget does not even set any targets for bringing petroleum products under GST.

The Budget is also ominously silent on the power sector, which continues to be beleaguered by payment security problems. Renewables have got a nodding concession in the form of the second phase of National Solar Mission with a target of 20,000 MW. The finance minister proudly announced that 100% of rural electrification targets have been achieved. That would have any meaning only when these areas get reliable power supply for at least eight hours a day to begin with. That remains a dream for most villagers.

Sudha Mahalingam is an independent energy consultant and former member, Petroleum and Natural Gas Regulatory Board.

  • K SHESHU BABU

    After deregulation, even when petrol and diesel rates were lower internationally, the prices in India remained on the high side . The government had earned ‘ buffer’ by saving the difference. The extra amount so obtained should have been used for developmental purposes